Re: S=I, an old debate.

["William B. Ryan" <william_b_ryan@xxxxxxxxxxx>]

Louis-Philippe Rochon had written:
http://csf.colorado.edu/mail/pkt/nov97/0113.html

"Saving must always follow investment.  It is the sine qua non of the
system.  Money is introduced through bank loans used to finance
investment...Moreover, S is not brought into equality through changes in
income, as is explained in the theory of effective demand.  Rather, S is
always equal to I, in all periods and at all times.  Surely, this is an
old debate."

Leigh Harkness commented:
http://csf.colorado.edu/mail/pkt/nov97/0196.html

"Rather than looking at saving and investment, let us ask the question
whether expenditure can exist before income (production).  That appears
to be a bit like asking: which came first, the chicken or the egg."

Paul Davidson then responded:
http://csf.colorado.edu/mail/pkt/nov97/0206.html

"Which came first is a rather silly dispute.  Current saving (as opposed
to savings, i.e., the accumulation of past saving) is a flow out of
current income and income is a flow--hence both current saving and
current income are simultaneous flows.  Neither comes first."

Davidson is correct.

It is truly meaningless to discuss which comes first, the chicken or the
egg.  Both are parts of the same process, the transmission of life from
generation to generation.

The same is necessarily true for every dynamic process.  It is not
proper to consider any element of a continuous process to be the
dependent variable or function of another; each element is the same
process observed or measured at different points.

Of special concern to economists are saving and investment, which can be
simultaneously equal only in the imagined stationary economy.  Whether
one is greater than the other depends entirely on when, how and where
credit is introduced.

If credit is introduced in the form of loans to entrepreneurs, the
instantaneously measurable rate of investment will always exceed that of
the accumulation of savings.  It would therefore be proper to say that I
is > S.

But it is possible to think of an economy where all new credit is
introduced as credits to consumers, who will spend some on increasing
consumption, and save the rest.  That which is saved becomes available
to be lent to entrepreneurs.  That which is spent increases the profits
of entrepreneurs, who will retain some of it for further investment.  In
this economy, S is > I.

The operative factor to both economies is neither saving nor investment,
but credit.

http://www.geocities.com/CapitolHill/Senate/7018/







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